Life science companies have typically relied on underwritten public offerings, private investment in public equities and licensing agreements to raise capital. But given the current economic conditions, such financings are not available to many companies. There are, however, alternative financing vehicles worth consideration.

Registered Direct Offering. RDOs are offerings of securities to a select group of investors. The securities are registered with the Securities and Exchange Commission on a "shelf" registration statement and some or all are sold directly to investors at a later date. The marketing is generally conducted by a placement agent on a "best efforts" basis. The identity of the issuer may remain confidential until investor interest is established. There is no prior public announcement of the offering, allowing the issuer to measure interest in the financing without the downward pricing pressure that often follows such an announcement. Unlike PIPEs, securities sold in an RDO are immediately liquid, making the financing more attractive to investors and limiting the discount to market price at which the securities are sold.

However, some issuers may not be eligible for a shelf registration or may encounter difficulties with other statutes, regulations and exchange rules. Additionally, the placement agent requires due diligence, legal opinions and comfort letters, which can be expensive. Also, if securities are offered at a discount, stock exchange approval requirements may apply.

Companies completing RDOs this year include Ariad Pharmaceuticals Inc. and Pharmasset Inc.

At-the-Market Offering. ATMs are registered offerings of variable numbers of shares directly into the market at prevailing market prices over a period of time. The issuer sells the securities periodically at its discretion directly into the market through a broker-dealer engaged as a placement agent. ATMs afford issuers the advantage of determining the parameters of each sale, including the timing and duration of the sale period, the number of shares to be sold and a minimum price. The issuer gives sales instructions to the placement agent and can commence or terminate the sale at any time.

However, ATMs also require eligibility for a shelf registration and may implicate other statutes, regulations and exchange rules. Additionally, placement agents generally require costly diligence, legal opinions and comfort letters at repeated intervals during the offering period. The public announcement of the ATM could have a negative effect on the issuer's trading price.

In January, Novavax Inc. established an ATM sales program.

Rights Offerings. Rights offerings involve the issuance of rights to purchase a pro-rata portion of securities to existing stockholders. Typically, the issuer sets the price of securities at a discount to the market and limits the period for exercising those rights. Rights offerings afford existing stockholders the chance to participate in order to avoid dilution. A "backstop" buyer who agrees to purchase shares underlying unexercised rights can ensure a successful offering even with low stockholder participation. Rights offerings are generally exempt from exchange stockholder approval requirements.

Limitations include a concern for low participation when no backstop is available and that the announcement of the offering will negatively affect the stock price. Finally, rights offerings may also implicate other statutes, regulations and exchange rules, which could increase costs.

Recent rights offering filings include Anesiva Inc. in March and Pro-Pharmaceuticals Inc. in January.

Equity Lines. Equity lines are committed credit facilities from an investor available on an as-needed basis over time. Equity lines provide the flexibility of the issuer to decide if and when to access capital. Generally, equity lines provide for no minimum use penalties, and because they can be used "as needed," they minimize dilution.

In terms of limitations, the agreements often provide for operating and financial restrictions. Additionally, the issuance of new shares under the agreement requires an effective registration statement, which can delay the initial availability of funds.

Recent equity lines include Arena Pharmaceuticals Inc. in March and RXi Inc. in February.

Asset Sales. Asset sales generally involve the transfer of noncore assets for cash. Asset sales provide an immediate, non-dilutive means of raising capital. They can allow a company to reduce expenses and strengthen its balance sheet while permitting it to focus on core assets. Before an asset sale, a company should carefully evaluate whether they might be selling a valuable product too early, as well as whether stockholder approval is required.

In January, Exact Sciences Corp. announced the sale of certain assets related to prenatal and reproductive health to Genzyme Corp.

Selling an Option or Company with Potential Future Payments. These options are typically the right to acquire the company or a technology at a specified time for a predetermined price. The optionee chooses whether or not to exercise the option based upon technological success or milestone achievement. While the sale of an option to acquire affords a company a means of an immediate and non-dilutive capital infusion, the capital comes at a high cost. Option sales essentially mitigate the risk for a buyer without diluting the rewards. Before selling an option, a company should consider whether stockholder approval is required.

In better times, companies would avoid such disadvantageous terms. In the present economic climate, it could be a feasible option giving a company the chance to continue operations. In March, Proteon Therapeutics Inc. received $38 million from Novartis AG. If Proteon's Phase 2 trial is successful, Novartis has the option to purchase Proteon for $550 million. In January, Cephalon Inc. paid $100 million for an option to acquire Ception Therapeutics Inc. If Ception attains certain milestones, Cephalon has the option to purchase Ception for another $250 million.

Another strategy is an earnout arrangement where a company or technology is sold and the buyer commits to paying additional future consideration contingent upon successfully meeting milestones. An example is the acquisition of Indevus Pharmaceuticals Inc. by Endo Pharmaceuticals, which closed in March.

Private Foundation Funding. Biotech companies are increasingly finding success in obtaining funding from foundations and patient advocacy groups. Financing can come in various forms such as grants, loans or sales of equity.

When available, this type of funding offers an immediate cash infusion that is typically non-dilutive to stockholders. Potential disadvantages include smaller amounts of money, restrictions on assets, milestone requirements and the possibility that technology might have to be returned if certain targets are not met.

There are many examples of private foundation funding to both private and public companies. Over the past few years, the Michael J. Fox Foundation contributed capital to Ceregene Inc. for its gene therapy study; the Juvenile Diabetes Research Foundation has funded Tolerex to support a Phase 3 trial, and the Epilepsy Therapy Project, a patient advocacy group, has also provided funding.

Collaborative Development Program. CDPs generally consist of an investor committing a certain amount of funding and its own collaboration efforts to a newly formed entity for purpose of accelerating development of pipeline candidates of a single company. The company contributes one or more products to the joint venture. In the typical arrangement, the company retains an exclusive option to acquire the joint venture at a pre-negotiated price in the future. Generally, investors look to later stage products for this type of deal.

CDPs offer companies a non-dilutive method of continuing to develop pipeline candidates. The structure enhances the chances of success and allows the company to retain the commercial upside while reducing expenses and minimizing the cost of capital. CDPs also help to ensure that the company does not prematurely out license products.

One recent example is OXiGENE Inc.'s October collaboration, which involved the infusion of funds into a newly formed entity and additional funding directly to OXiGENE.

Royalty Stream Monetization. Royalty stream monetization allows a company to convert an expected revenue stream from marketed, about to be marketed or late stage, products into cash. The deal can be structured in various ways, including on a tiered basis so the licensor retains a portion of the upside if the royalty stream ends up being lucrative.

Royalty streams provide for an immediate non-dilutive cash infusion. Selling a royalty stream can be a means of managing the risk that royalties will not reach desired levels. Additionally, equity markets often do not fully value the royalty streams of companies, so selling the royalty streams can be a way to receive tangible assets to offset market undervaluation. There can be significant disadvantages in terms of the discount and potential loss of upside to the company. There are many examples of royalty stream monetization transactions.

Raising capital in these times is difficult, but there are creative alternatives for life science companies to consider. Although this article introduces various alternatives, a thorough discussion of the complexities of each is beyond its scope.

Faith Charles is a member in the corporate practice of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC's New York office, with a focus on life sciences. Daniel Follansbee, a member in the corporate practice of the firm's Boston office, and Tavis Morello, an associate in the Boston office, also contributed to the article.